Bitter Story of Sweet Revdi

In June 2022, issue of the RBI bulletin, a research article written by officers of the Department of Economic and Policy Research under the guidance of Dr. Michael Debabrata Patra Deputy Governor, RBI had raised concerns over freebies against the backdrop of the Sri Lankan crisis. The contents of the article can be summarised as under-
The recent economic crisis in neighboring Sri Lanka is a reminder of the critical importance of public debt sustainability. The fiscal conditions among states in India are showing warning signs of building stress. For the five most indebted states, the total debt is no longer sustainable, as the increase in debt has outpaced their Gross State Domestic Product (GSDP) growth in the last five years.



Stress tests show that the fiscal conditions of the most indebted state governments are expected to deteriorate further, with their debt to GSDP ratio likely to remain above 35 percent in 2026-27. Provision of free electricity, free water, free public transportation, waiver of pending utility bills, and farm loan waivers are often regarded as freebies, which potentially undermine credit culture, distort prices through cross-subsidization eroding incentives for private investment, and disincentives’ work at the current wage rate leading to a drop in labor force participation.

The article warned that rising expenditure on non-merit freebies and the ballooning overdue of DISCOMs (Electricity Distribution Companies) have emerged as new sources of financial risks and hence as a corrective measure, the state governments must restrict their revenue expenses by cutting down expenditure on non-merit goods in the near term.

The data from the Comptroller and Auditor General of India (CAG) also shows that the state governments’ expenditure on subsidies has grown at 12.9% and 11.2% during fiscal 2020-21 and 2021-22, respectively, after contracting in 2019-20.

However, the issue of freebies became a “topic of hot political discussion” after Prime Minister Narendra Modi while speaking at a function at Jalaun in Uttar Pradesh on 15th July 2022 expressed concerns about the ‘revdi’ (a sweet of jaggery and sesame seeds) culture of political parties promising freebies to garner votes. The PM said: "The 'Revadi culture' (freebie culture) is dangerous for the development of the country. The followers of 'Revadi culture' will never build expressways, airports, and defence corridors. People, especially, the youth have to be cautious of such designs as this culture lures the youngsters by freebies and pushes their future to darkness. Together we have to remove this freebie culture from the country's politics."

While there is no precise definition of freebies, it is necessary to distinguish them from public/merit goods, expenditure that brings economic benefits, such as the public distribution system, employment guarantee schemes, and states’ support for education and health. In general terms, freebies mean that something is given to someone for free. The tendency of governments and political parties to promise ‘freebies’ to win elections is not new. Particularly around elections campaigns, political parties promise voters, things like free power, water, loan waivers, computers, grinders, TVs and bicycles etc. Announcing freebies and subsidies in the poll manifestoes can be allowed if there is a revenue surplus in the state budget. But what is happening at the ground level is that the state governments borrow to implement these freebies which in turn add to their debt burden.

We are a democratic society and have adopted a welfare economy and it is the duty of the Central/state governments to protect the marginalized sections of the society. Hence the welfare schemes launched by Central/state governments during COVID like pandemic or natural disasters to protect the human lives cannot be considered as non merit freebies (Revdi). It will be malicious to interpret that Prime Minister also criticized such welfare measures.

It would have been better that the issue of ‘freebies’ would have been discussed with the seriousness that it deserves but unfortunately, it turned out to be very ugly when Tamil Nadu Finance Minister Palanivel Thiaga Rajan targeted the central government over its stance on the “revdi” (freebies) culture across the country, and asked “on what basis” state governments should change their policy. Speaking to India Today, Shri Thiagarajan said, “Either you must have a constitutional basis to say what you are saying, in which case we all listen, or you must have special expertise, you must be have a double PhD in Economics, or you must have a Nobel Prize or something that tells us you know better than us. Or, you must have a performance track record that you have grown the economy wonderfully or you brought down debt, increased the per capita income or created jobs”.

AAP President Kejriwal promised free electricity and other facilities including for women and pensioners in Gujarat and Himachal Pradesh once elected in the election and further added fuel to discussion. The reactions from other political parties were almost similar and hence it will be futile to expect a fair discussion on the issue by politicians.

However to put the record straight Finance Minister Nirmala Sitharaman shed some light on the debate over freebies. She said that the Modi government aims to empower everyone through saturation of the existing welfare schemes as every Indian citizen deserves access to basic facilities. FM said, "Every Indian citizen deserves to have access to basic facilities without getting beholden to anybody. Our approach is one of empowerment through saturation of existing schemes rather than that of entitlement."

In fact, a PIL was already filed in the Supreme Court on 22nd Jan 2022, by BJP leader and advocate Ashwini Kumar
claiming that promise or distribution of irrational freebies from public funds before elections could unduly influence the voters, shake the roots of a free and fair election, and disturb the level playing field, besides vitiating the purity of the election process. The plea contended that such decisions by the political parties violated Articles 14, 162, 266(3) and 282 of the Constitution. It sought directions to the Election Commission to seize election symbols and deregister political parties that promised to distribute irrational freebies from public funds.

The plea claimed that political parties' arbitrarily promising irrational freebies from public funds for wrongful gain and to lure voters in their favour is analogous to bribery and undue influences. The injury to the citizens is extremely large because Punjab needs Rs 12,000 crore per month to fulfil the political promises if AAP comes in power; Rs 25,000 crore per month if SAD comes in power and Rs 30,000 crore if Congress comes to power, although GST collection is only Rs 1,400 crore, it pointed out. "In fact, after debt repayment, Punjab government is not able to pay even salaries-pensions, then how will it provide freebies? The bitter truth is that Punjab’s debt is increasing every subsequent year. State’s outstanding debt has increased to Rs 77,000 crore, with Rs 30,000 crore accumulating in present financial year itself," it claimed. The petitioner said that the time is not too far away when one party will say that “we will cook food for you in your residence” and another will say that “we will not only cook, but also feed you” as each party tried to undo each other in terms of terms of populist promises. (It should be noted that captioned PIL was filed in the Supreme Court on 22nd Jan 2022 and Legislative Assembly elections were held in Punjab on 20th February 2022 and the results were declared on 10th March 2022.)

The Supreme Court has wondered if we need a law to end the freebie culture or how much freebies can be allowed and their impact on the economy and advised the government to appoint an expert committee to examine the issue after the Election Commission expressed its helplessness in regulating it. Of course, there is a law to keep a lid on government spending called as “The Fiscal Responsibility and Budget Management (FRBM) Act” but it needs much more teeth, in line with global best practices.

The Supreme Court will give ample opportunity to all stakeholders to present their views on the subject but let us examine the present status. The review committee of the FRBM Act has prescribed that the states should not exceed their total debt by 20% to Gross State Domestic Product (GSDP). However the situation is alarming for certain states. In 2021-22 total Debt to GSDP for Punjab was highest at 53.3%, it was 39.5% for Rajasthan, 38.6% for Bihar , 34.9% for Uttar Pradesh , 34.4% for West Bengal, 33% for Jharkhand, 32.5% for Andhra Pradesh and so on respectively. Silver lining is that only 2 states were within the range, Maharashtra @17.9% and Gujarat @19%.
FRBM Act also prescribes that states should manage their debts in such a way that interest on debts does not exceed 10% of their revenue receipts. Here also states have shown scant discipline. The percentage of interest payments during 2021-22 to their respective Revenue Receipts for Punjab was highest at 21.3% followed by Tamilnadu at 21% , Haryana at 20.9% West Bengal at 20.8% , Kerala at 18.8% , Rajasthan at 14.9% , Karnataka and Andhra Pradesh at 14.3% , Gujarat at 14.2% , Madhya Pradesh at 11.7% , Maharashtra at 11.4% , Uttar Pradesh at 11.2%. Bihar, only Jharkhand, Odisha and Chhattisgarh were below the 10% stipulated ceiling.

Now just consider the economy of Punjab whose Total Debt to GSDP ratio in 2021-22 was highest at 53.3% and its percentage of interest payments during 2021-22 to Revenue Receipts was highest at 21.3%.

With unhealthy competition among political parties to lure the voters and garner power it seems there is very little hope that any sane suggestion to abide by financial discipline will be taken seriously. But the recent steps taken by the Central Government are really worth appreciating. The central government has decided to reduce its subsidy spend of Rs.3.69 Lakh Crore during the last financial year of 2021-22 by 26.6% and restrict it to Rs.3.17 Lakh Crores for the current financial year of 2022-23. Economists and rating agencies the world over have hailed the Central Government for this bold step of giving more weightage to growth over political populism. Some economists have suggested that Central Government should step in to constrain state governments from overspending. They have even suggested that Central Government should invoke Article 293 (4) of the constitution and should impose conditions of financial viability while granting consent to state governments for raising loans. It’s easy to preach than practice under the present political condition of the country but after looking at the economic crisis of neighbouring countries like Sri Lanka and Pakistan, we must wake up.